Aug. 22 (Bloomberg) -- Discover Financial Services, the
second-best performer among 81 U.S. financial firms this year,
climbed 3.9 percent to a record high and EBay Inc. shares also
advanced after announcing a payment-processing deal.

Customers of EBay’s PayPal unit can use their accounts at
more than 7 million merchant locations that accept Discover
starting in the second quarter of 2013, Don Kingsborough,
PayPal’s vice president of retail services, said in a conference
call after today’s announcement. The arrangement eventually may
expand to include international markets, the companies said.

The partnership gives PayPal, which seeks to transfer its
online success to the physical world, access to a network that
reaches about the same number of U.S. merchants as Visa Inc. and
MasterCard Inc. Online purchases accounted for less than 8
percent of U.S. retail spending last year and PayPal now can
target consumers where they do most of their shopping, said Beth
Robertson, a payments analyst at Javelin Strategy & Research.

“That’s the significant piece of the pie that now they’re
going to have access to,” said Robertson, who was briefed on
the agreement in advance. “For PayPal, it’s a move out of their
traditional online arena.”

Top Performers

Discover rose $1.43 to close at $38.43 in New York, the
highest since its 2007 spinoff from Morgan Stanley. Shares of
the Riverwoods, Illinois-based lender climbed 60 percent this
year, making it the No. 2 gainer in the Standard & Poor’s 500
Financial Services Index, after Regions Financial Corp. EBay
advanced 2.5 percent to $47, second-most today of 71 firms in
the S&P 500 Information Technology Index, after Autodesk Inc.

The tie-up also will drive more transactions to Discover’s
network, the fourth-biggest in the U.S. by that measure after
Visa, MasterCard and American Express Co. It could boost annual
earnings per share at Discover by 6 cents to as much as 23 cents
if spending “grows rapidly,” Donald Fandetti, a Citigroup Inc.
analyst, said today in a research note.

The deal “will help shape the emerging payments landscape
by bringing together an established direct-banking and payments
company with a leading commerce enabler to create an alternative
payments option for consumers at the point of sale,” Diane
Offereins, president of payment services at Riverwoods,
Illinois-based Discover, said in a statement.

Smartphones, Cards

EBay, the world’s largest Internet marketplace, generated
40 percent of second-quarter revenue from PayPal, which had
113.2 million active accounts as of June 30, the San Jose,
California-based company said last month. The total value of
processed transactions climbed 20 percent to $34.5 billion in
the period from a year earlier, the firm said. Worldwide volume
on Discover’s network rose 9.4 percent to $78.4 billion in its
fiscal quarter ended May 31, data compiled by Bloomberg show.

PayPal customers will be able to use plastic payment cards
or smartphones linked to their accounts to make purchases in
stores, Joby Orlowsky, Discover’s vice president of strategic
initiatives, said yesterday in an interview.

The service will begin with 1,500 “large” merchants and
Discover will charge a network fee, Kingsborough said on the
call. PayPal will have access to merchants’ sales data and use
it to improve service, he said.

“The first phase will be issuing a card,” said
Kingsborough, 65. The card will become less important as
technologies evolve, he said. “To integrate into the life of
the consumer, you have to be wherever the consumer wants to
shop.”

No Guarantee

There’s no guarantee that PayPal’s customers will readily
embrace the ability to use their accounts at stores, said
Citigroup’s Fandetti.

“Until mobile reaches high penetration, which is years
out, there is a question about how many PayPal users would use
the plastic card,” he wrote. “Their volume is very small in
the big picture of payments volumes through the major
networks.”

PayPal was founded in 1998 by Peter Thiel, Elon Musk and
Max Levchin and sold to EBay four years later for about $1.18
billion. The unit charges merchants a percentage of the purchase
price, typically 1.9 percent to 2.9 percent plus a fixed 30
cents. It’s a partner of the traditional payment networks, whose
cards are used to fund customer accounts, and also a rival when
consumers choose to transfer money directly from bank accounts.

Network Fees

Discover, led by Chairman and Chief Executive Officer David
Nelms, 51, will charge PayPal for access to the network,
Kingsborough said. He declined to disclose the terms or whether
PayPal previously discussed a potential deal with competitors
including San Francisco-based Visa and MasterCard, based in
Purchase, New York.

The deal could “raise modest concerns” in the long-term
among investors that it will erode the major networks’ market
share, according to Fandetti.

PayPal ventured into brick-and-mortar payments earlier this
year in a partnership with Home Depot Inc., part of a push to
wrest market share from Visa, MasterCard and New York-based
American Express. PayPal subsequently added 15 more merchants,
including Jamba Juice Co., J.C. Penney Co. and Office Depot Inc.

Discover and PayPal collaborated previously on Money
Messenger, a tool that lets customers send funds on the Internet
or a smartphone using only a recipient’s e-mail address or
mobile phone number.